If not for the divorce, the business partners might still be
together. The two men had scraped together enough money to open a
small pool supply store, which they built over 20 years into a
profitable chain of 65.

But suddenly things got ugly. In the throes of a divorce, one
partner decided he needed cash fast. Hoping to sell his half of the
company, he found a group of investors who wanted the whole
business. The other partner didn't want to sell; he offered to
buy his partner out for less than the partner wanted. Instead, the
partner who wanted out persuaded a judge to order the partnership
dissolved, the assets sold, and his former partner fired for
interfering with the takeover.

Partnership disputes are nearly as common as partnerships. As
the partners above learned, they often land in court. Better to
avoid problems by anticipating what can go wrong and drafting a
partnership agreement for all partners to sign.

Many partnerships fail to do this. In family businesses, for
example, where decisions are often made informally, it's hard
to imagine the tensions that plague thousands of other family
businesses could ever crop up in yours. If you've just started
a business, handling legal details may be far down on your list of
things to do.

You may think any problems can be resolved amicably as they
arise. However, partnerships wed personalities with goals and
management styles that often differ markedly. One partner may want
to sell out when the other doesn't have the money to buy. One
may want to expand the operation dramatically, while the other
would rather coast. If you agree in advance how to resolve these
disputes, there's less chance a judge will have to sort it
out.

Legal Underpinnings

Typically, when a business with more than one owner hasn't
filed papers to form a corporation or limited liability company,
courts treat it as a partnership. Partnerships in every state but
Louisiana are governed by the Uniform Partnership Act, a set of
laws adopted nearly 80 years ago.

The Uniform Partnership Act includes two traps for the
uninformed. One concerns a partner's right to get out. Unless
there's a partnership agreement to the contrary, a partner may
quit or retire at any time, compelling the remaining partners to
pay fair value for his or her interest. If the remaining partners
don't have enough money available, they may be forced to
liquidate the business.

The second trap concerns price. Although the law requires the
remaining partners to pay "fair value," it doesn't
specify how that value is determined. Typically, the partner who
wants out expects more than the others are willing to pay. If the
partners can't agree, they may have to ask a judge to set the
price. Like any lawsuit, this is likely to be expensive and
time-consuming. It's also unpredictable because most judges
have little experience in determining the value of a partnership
interest.

Avoid such problems by drafting and signing a partnership
agreement that sets out how business decisions are made, how
disputes are resolved and how to handle a buyout. In many cases,
the process of negotiating terms helps the partners understand each
other and design a structure they're all happy with.

Consult an attorney experienced with small businesses for help
in drafting the agreement; a small investment at this stage can
save you major headaches later. The attorney will suggest terms to
consider. Here are some to get you started:

How is ownership interest shared? Two owners need not
share ownership and authority 50-50. Depending on the assets and
time each contributes, you may decide on some other proportion. But
make sure that proportion is stated clearly in the agreement.

How will decisions be made? Typically, partnerships
operate on consensus. In case of major disagreements, though,
provide for voting rights. Beware of the possibility of deadlock
when two partners own the business 50-50. Some businesses with two
partners avoid deadlock by providing in advance for a third
partner, a trusted associate who may own only 1 percent of the
business but whose vote can break a tie.

When may a partner retire? At what age must a partner
sell his or her interest to the others? If one partner decides to
retire at 50 and live off the proceeds of the sale, it can be a
hardship for the others. Likewise, if an aging partner wants to
hang around and draw a full salary, it can cause resentment among
younger, harder-working partners. The agreement might provide that
payment for the partnership interest would be less if a partner
quits before a specified retirement age.

When one partner withdraws, how is the purchase price
determined? You might agree on a neutral third party, such as
your banker or accountant, to select an appraiser to determine the
price of the partnership interest. Another option is stating a
formula, such as a percentage of book value or a multiple of net
profit. Be sure to review the formula periodically; it may cease to
be appropriate as the business matures.

When will the price be paid? Requiring the entire
purchase price up front could devastate cash flow. Typically,
partners agree that the money be paid over three, five or 10 years,
with interest. Since it's impossible to know the market
interest rate for a breakup that could be decades away, most
agreements specify a floating rate tied to some index such as a
percentage of the prime rate.

Where will the money come from? A partner's
unexpected death or withdrawal can leave the others strapped for
cash. Some firms take out life insurance on each partner so if one
dies suddenly, there will be money to buy that partner's share
from the estate.

May a partner retire gradually? Consider providing for a
consulting agreement or partial retirement at a percentage of
former salary.

May a partner who withdraws compete with the
partnership? A partner who drops out could become a fierce
competitor. Consider a reasonable noncompete agreement (see last
month's "Legal Aid").

Once you negotiate and sign the partnership agreement, don't
dwell on it: Put it away, and get on with your business.